Bangladesh: Not simply a currency crisis, but an impending economic catastrophe

 Bangladesh: Not simply a currency crisis, but an impending economic catastrophe

Shipments of particular garments from Bangladesh increased in August and September, despite rivals reporting a steep fall in their own exports. Forex reserves have dropped from $48 billion in 2021 to a pitiful $21 billion. A $12 billion discrepancy between export revenues and shipping values points to possible data manipulation or malfeasance. Mishandling of exchange rates has damaged migrant workers' and their overseas remittances' confidence.

Unofficial rates of the Taka versus the US dollar began to decline in the middle of last year as the vulnerabilities in the Bangladeshi economy became more evident.

Bangladesh's foreign currency situation is becoming more severe. That should be directly attributed to a state of denial, opposition to structural changes, dubious policy choices, and, last but not least, unchecked corruption of the Sheikh Hasina regime in Dhaka.

According to official statistics from Bangladesh Bank, the currency reserve reached $26.9 billion in September 2023 after hitting a high of over $48 billion in 2021. The reserve has been dropping secularly for the last two years.

But because it contains a $6 billion export development fund (EDF), this figure is overstated. The funds were disbursed at concessional rates to a small number of influential business organizations that had a history of loan failure.

The others went along according to plan. Unpaid loans from the EDF were made. Bangladesh Bank, the country's central bank, and the government are now sending recovery circulars to commercial banks. Based on past performance, it seems like a sham.

In Bangladesh, "bank gaming" is a long-standing problem. Still, things were never as awful as they were. Under the ministry of finance, the state-owned banks are buried behind a mountain of bad loans. Private sector banks under the supervision of central banks used to perform better than others, but that is no longer the case.

Forex Reserves Being Depleted

Bangladesh's foreign exchange reserves fell to $20.96 billion in October, net of EDF. This was much less than the International Monetary Fund's (IMF) September benchmark of $25.34 billion. The IMF decided to extend a $4.7 billion loan to support the nation's macroeconomic stability.

Notably, Dhaka put strong import limitations in place to limit the outflow of foreign currency. The monthly import cost is currently less than $5 billion, down from $6.4 billion in 2021 and $7 billion in 2022. A rupee trading window has also been extended by India.

But none of the measures were successful. The value of foreign currency reserves decreased by $2 billion from August to October of 2023. The influx is mostly to blame for the issue.

Two main sources of foreign cash for Bangladesh are remittances and ready-made clothing, which account for 85% of exports.

Estimates that are now available show that although remittance earnings decreased by 13% in the September quarter, exports increased by more than 9%. Despite a record-breaking 11.37 lakh migrant worker departure in 2022–2023 (July–June), there was a drop.

There is obviously a problem here. The deliberately low official exchange rate and noticeably greater value offered via Hundi or unofficial/illegal money transfers provide the hint.

Currency Rate Mess

The Taka, the indigenous currency of Bangladesh, does not have a market-determined exchange rates. Even worse, it has at least four or five distinct administered rates for various groups, such as remitters, importers, and exporters.

In the past, the central bank adjusted dollar rates in accordance with an unofficial peg between the Indian Rupee as well as the Bangladeshi Taka. That design was upset by the recent upheaval in the local and global economies.

Unofficial rates of the Taka versus the US dollar began to decline in the middle of last year as the vulnerabilities in the Bangladeshi economy became more evident. Wide disparities exist between official and unofficial rates because the central bank attempted to maintain the artificial strength of the local currency rather than acknowledge reality.

The export-oriented economy of Bangladesh ought to have benefited from the Taka's depreciation. But the politically influential ready-made garment (RMG) industry has a separate set of rules.

They demand that inexpensive cloth and other supplies be imported. A portion of the export earnings is held overseas. A falsified financial statement that displays little or no profits enables them to reap several advantages at home, such as not repaying debts.

Dhaka chose to maintain low exchange rates in order to appease the RMG industry. Through Hundi, Bangladeshi laborers send money home from overseas. There was a free decline in the reserves.

As of right now, Taka 110 is the official exchange rate of Bangladesh Bank for a dollar. No importer receives money less than Taka 112. Remittance inflow rates were recently increased to Taka 115. The dollar is sold on the curb market for Taka 120 and above.

manipulated data

Based on the observed patterns, one may wonder whether Dhaka is going through a narrow foreign currency crisis or a more extensive economic catastrophe. Poor data quality, especially in places that are thought to be impervious to tampering, is a worry.

According to a recent analysis, there would be a $12 billion discrepancy between the amount of shipments reported by the Export Promotion Bureau and the amount Bangladesh Bank estimates it will receive in export profits via banking channels in 2022–2023.

With just $43 billion in total exports, the margin is as much as 28%. Is there a chance of a simple mistake or duplicate counting? Not likely. According to media allegations citing anonymous central bank officials, it seems that money has been stashed overseas.

However, did that make Dhaka policymakers take notice? In no way. In August-September of this year, exports of clothing increased by 17 percent in the knitwear (HS 61) and 7 percent in the non-knitted or woven (HS 62) categories, according to Bangladesh Bank.

The reason for the beginning of the data is that rival countries reported a significant drop in exports of comparable types.

Vietnam announced a 16 percent decrease in apparel export revenue from January to August compared to the same period last year. ITC Trade Map indicates that during July and August, shipments falling within the HS 61 and HS 62 categories decreased significantly. August brought a steeper decline.

India has a comparable tale to share. The Ministry of Commerce reports that from April to August, knitwear exports decreased by 20% and by 12%, respectively. Exports of items other than knitwear have decreased by 4% and 11%, respectively.

How therefore might Bangladesh continue to be an anomaly?

Even the the position of vice president of the Bangladesh Knitwear Manufacturers as well as Exporters Association seems to be ignorant, according to media sources. Since the middle of last year, the industry has been experiencing an order difficulty, and the majority of factories—including his—are operating at reduced capacity.